Mao Geping: Short-term pressure, but long-term prospects remain strong thanks to strategic capital raising and breakthroughs in skincare.

Overview

Morgan Stanley released a research report maintaining its “Overweight” rating on Maogeping (1318.HK), while sharply lowering the target price from HK$100 to HK$72. This revision primarily reflects market concerns about liquidity triggered by the recent share‑sale plan of the major shareholder, which has weighed on the stock’s near‑term valuation. However, the report’s key thesis is that this pressure could also present an opportunity: if the controlling shareholder seeks to unlock liquidity, bringing in strategic investment from a global beauty giant could prove a win‑win outcome. Not only would this help orderly ease the selling pressure, but it would also leverage the international giant’s R&D capabilities to strengthen Maogeping’s skincare business, thereby unlocking the brand’s long‑term value.

Core views

Short-term valuations are under pressure, but fundamentals remain unchanged: The research report notes that a shareholder‑initiated share sale disclosed on May 15 caused the stock price to drop by 7.6%, prompting market concerns about potential future liquidity pressures from other shareholders. While this development does not alter the company’s underlying fundamentals, short‑term valuation multiples may remain subdued until investors gain clarity on subsequent selling activity or observe more sustained, robust earnings performance. Accordingly, institutions have revised down their sales forecasts for 2026 and 2027 by 2%–3% each and lowered the target P/E multiple from 28x to 21x. Strategic investment presents a potential win‑win solution: The report outlines a non‑baseline scenario: should major shareholders seek meaningful liquidity in the coming years, an investment from a global beauty group could serve as an ideal exit strategy. Since the pandemic, global beauty conglomerates have shown heightened interest in Chinese brands, and Maogeping— a rare high‑end Chinese brand with over two decades of history and resilient growth even amid industry headwinds—offers unique appeal. For strategic investors, Maogeping’s network of premium department‑store counters, its aesthetic positioning, and its integrated online‑offline ecosystem are difficult to replicate internally. Makeup as the foundation, skincare as the wings: The report underscores that makeup remains Maogeping’s primary traffic driver, with makeup revenues expected to approach RMB 5 billion in the next few years (around RMB 3 billion in 2025). However, the skincare business holds the key to unlocking the brand’s value over the next three to five years. Currently, skincare accounts for 37% of total revenue, yet much of this growth is still fueled by cross‑selling from makeup. To become an independent growth engine, Maogeping must achieve breakthroughs in proprietary ingredients, formulation science, and efficacy validation—areas where global beauty giants enjoy stronger pipelines and deeper dermatological expertise. Strategic partnerships could help bridge these capability gaps. Substantial long‑term value potential: Under a bull‑market scenario, assuming balanced growth across both makeup and skincare segments, the company’s long‑term revenue potential could reach RMB 10–15 billion. With net margins remaining around 24%, this would translate into an earnings pool of RMB 2.4–3.6 billion. Applying a 20x P/E multiple—reasonable for high‑ROE, long‑cycle, premium‑tier brands—the implied valuation could range from RMB 48–72 billion, equivalent to HK$113–170 per share. This significantly exceeds the current share price and also surpasses the firm’s base‑case target price.

Analysis framework

The research report employs a comprehensive analytical framework that integrates fundamental analysis, scenario-based assumptions, and industry benchmarking. First, it adjusts the financial model to reflect near-term risks: anticipating weaker offline foot traffic and higher online marketing expenses, the firm has revised down its revenue and profit margin forecasts, thereby deriving a new base-case target price. Second, it conducts a comparative analysis by drawing on the industry’s M&A history: reviewing the three distinct phases of foreign‑capital acquisitions in China’s beauty sector—from full‑ownership takeovers to cautious observation, and now to minority stakes and strategic partnerships—and referencing cases of Korean beauty brands such as 3CE and Dr.Jart+ that were acquired by global giants. This approach underscores the feasibility and underlying value rationale of strategic investments at the current stage. Finally, the report constructs a segment‑based valuation and long‑term potential model: breaking the business into two segments—color cosmetics and skincare—and projecting each segment’s market‑size ceiling (with China’s skincare market roughly five times the size of the color‑cosmetics market). By factoring in net profit margins and P/E multiples, the model estimates a long‑term bull‑market valuation range. This methodology not only focuses on current financial metrics but also places particular emphasis on assessing the company’s ability to generate sustained value under various strategic pathways.

Methodology notes

• Valuation MethodologyPE/PEG valuation

  Price-to-Earnings (P/E) Valuation Method

  The research report employs the price-to-earnings ratio as its primary valuation metric, deriving target prices by applying different P/E multiples—21x as the base case, 31x in a bull market, and 15x in a bear market—based on expectations for the company’s future earnings growth (2026 EPS). This reflects the market’s differential pricing of growth potential and certainty.

• Competition and Strategic FrameworkMoat / competitive advantage

  Brand Equity and Channel Barriers

  The research report underscores that Maogeping’s competitive moat lies in its distinctive high-end brand image, a department-store counter network cultivated over two decades, and an “makeup + skincare + training” ecosystem. These constitute hard-to‑replicate advantages that set it apart from purely online or mass‑market brands and serve as the key value drivers for attracting strategic investors.

• Industry/Industrial Analysis FrameworkTransmission across the upstream, midstream, and downstream segments of the industrial chain

  Evolution of Foreign-Investment Entry Modes in the Cosmetics Industry

  The research report outlines three stages in the entry of foreign capital into China’s beauty market: early-stage efforts to acquire controlling stakes in order to gain access to distribution channels; mid-stage cautious observation; and recent shifts toward minority equity investments to capitalize on innovation and cultural expression. This industry insight helps readers understand why strategic investments are more likely to materialize at this particular time than wholly owned acquisitions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Mao Geping (1318.HK)

  Beneficiary: If a global strategic investor is successfully brought on board, it will alleviate liquidity concerns, strengthen skincare R&D, and drive a revaluation of the company’s valuation.

  Strengths

  A rare, high-end domestic brand with an extensive offline counter network and strong brand premium power; its color cosmetics business remains firmly established.

  Weaknesses

  The skincare business lacks a compelling, standalone narrative around potent active ingredients and relies excessively on cross-selling with color cosmetics, while also facing short-term selling pressure stemming from shareholder share reductions.

  Comparison

  Compared with other domestic brands that rely heavily on online traffic, Maogeping benefits from stronger offline barriers; meanwhile, it enjoys a distinct advantage over international luxury brands in terms of local cultural aesthetics, though it still lags behind in fundamental R&D.

  Risks

  Shareholder sell-offs have exceeded expectations; R&D of new skincare products has fallen short of projections; and a weak macroeconomic consumption environment is weighing on demand for premium beauty products.

Key data

• Target Price AdjustmentHK$100 → HK$72A 28% downward revision reflects short-term valuation pressure.
• 2026 Revenue Growth Forecast27%Slightly revised downward from the previous forecast.
• 2026 Net Profit Growth Forecast23%Affected by rising marketing expenses, the OPM assumption has been revised downward.
• Revenue Share of the Skincare Business (2025)37%It has become an important component, yet it still relies on color cosmetics to drive growth.
• Bull Market Scenario Target PriceHK$113Based on the assumptions of successful strategic investments and breakthroughs in the skincare business

Impact & implications

For Mao Geping, short-term stock price volatility is primarily driven by sentiment and liquidity expectations, rather than a deterioration in fundamentals. The research report suggests that if management can effectively address the issue of share sell‑offs by major shareholders—and even leverage this to bring in a strong strategic partner—it could significantly enhance the company’s long-term competitiveness, particularly in the skincare segment, which features high repurchase rates and premium value. For investors, the current valuation correction may present an attractive entry point, but close attention should be paid to shareholder activity and the progress of R&D on new skincare product categories. From an industry perspective, this underscores that China’s premium beauty brands are transitioning from a purely traffic‑driven model to a new phase characterized by brand equity and technology‑driven growth, with increasingly sophisticated collaboration models emerging with global industry leaders.

Risks

• The weakening macroeconomic backdrop for high-income consumers is weighing on demand for premium beauty products.
• Skincare product performance fell short of expectations, lacking support from any star ingredients.
• Intensified online competition has driven up marketing expense ratios, thereby eroding profitability.
• Overseas expansion is progressing more slowly than expected.
• Major shareholders have further reduced their holdings, resulting in sustained selling pressure in the market.

What to watch

• The major shareholders’ subsequent share‑reduction plans and whether there are any indications of contact with strategic investors.
• The pace of new product launches and market feedback in the skincare business, particularly whether there are any proprietary ingredients or technological breakthroughs.
• Same-store sales growth (SSSG) at brick-and-mortar department store counters and the pace of new store openings.
• Changes in the sales share of online channels and marketing efficiency (ROI).